Governments levy taxes on households and businesses in order to provide certain benefits to everyone. In the circular flow model, injections into the economy include investment, government purchases, and exports while leakages include savings, taxes, and imports.
What does the government produce in the circular flow?
Government collects revenue in the form of taxes and provides public goods and services to businesses and households.
What are the two types of markets in the circular flow?
There are two types of markets in the circular flow of goods and services. The resource market is where businesses purchase what they use to produce goods and services. Resources are in the form of labor, natural resources, capital, and entrepreneurship, all of which are supplied by households.
How are households involved in a circular flow diagram?
Households own the factors of production and consume all the goods and services that the firms produce. Households and firms interact in two types of markets. In the markets for goods and services, households are buyers and firms are sellers. In particular, households buy the output of goods and services that firms produce.
How does the government affect the circular flow?
The government purchases goods from firms and also factors of production from households. Thus government purchases of goods and services are an injection in the circular flow and taxes are leakages in the circular flow.
How are consumers involved in the circular flow of economic activity?
Consumers and firms have a dual role, and exchange with one another in two distinct ways: (1) Consumers or households own all the factors of production, that is, land, labour, capital and entrepreneurship, which are also called productive resources. They sell them to firms for producing goods and services.
